A friend and I were recently talking about how her boyfriend has no idea where his money goes each month and doesn’t save any money. She, working in finance and checking each individual transaction on her credit card statement against its receipt, could not fathom not knowing about her spending and not putting away money each month. A few days later, I saw an article that pretty much said the same thing as my friend’s boyfriend. The article stated 7 out of 10 Americans have less than $1,000 in savings, and this isn’t just folks who are low or middle income.
7 out of 10 Americans have less than $1,000 in savings
Over a third of folks making over $100,000 a year have less than $1,000 in savings as well. In addition, the US personal savings rate (i.e. the percentage of your income after taxes that goes into savings, investments, etc.) is down to half of what it was 50 years ago and is lower than almost all other developed countries. It seems like a large percentage of the country is either unable to save or not prioritizing it which reminds me of my 20s.
When I started making money out of college, I didn’t want to know where my money went and savings was a small priority. Instead of making a budget, I just took what I was making each month, deducted my rent, and hoped for the best. For the most part, this system worked out pretty well, and I have my parents to thank #shoutout. My parents were very strict when I got a credit card at 18 years old, threatening to cut up my credit card (that was NOT in their name) if they found out I had a balance. It really annoyed me that they were keeping such a close eye, but over the years, it started to make sense. My parents wanted to instill in me an ability to know when I can spend and when I can’t, what’s been coined “mental accounting.” I would never have labeled it this myself, but it’s definitely what I would do. I had created a subconscious system about how I spend my money that was based on my assessment: Is something worth the price? Will I regret if I don’t spend money on this? Do I have the money now or should I wait for a future paycheck? I would ask myself these questions in the moment and keep a semi-running mental list of where my expenses were for the month. I would target putting away a certain amount each month and if my mental math worked out, I got to save a little. The months where I didn’t really track well and went buck wild, I didn’t save.
It wasn’t the worst process, but I never reflected on where my money was going and wasn’t prioritizing saving. I never asked myself the question “Am I spending my money where I want to be spending it for now and the future?” As a result, at the end of some months, I would be frustrated that I couldn’t do or buy some of the things I wanted because the budget had run dry by the time these things popped up (which also really annoyed my friends when I made promises I couldn’t keep). What I was missing was a planning component – the part of mental accounting where I figure out where I want to spend and overlay that into my decisions, the dreaded process of BUDGETING. I think the word budget scares people (and me) because it implies work – thinking, calculating and ongoing assessment. Thinking about your priorities, divvying up the money you make, and then following up on yourself. If you are an Excel lover, you may love this – nothing like sitting down on a Saturday morning with a coffee and a color coded, Excel spreadsheet. For the rest of us though, facing our expenses doesn’t give us the same high so we put it off… and if you are like me, for a few too many years.
I finally started budgeting in my late 20s, and I’m a lot happier with my finances as a result. I don’t think I would have been able to save money without budgeting. It took me a little while to figure out my system – I didn’t want to build a robust Excel spreadsheet so I decided to start by looking at graphs of my historical spending by category. This may sound hard to do but credit card companies actually do this for you now so all you have to do is look at your online account. I looked at how my spending was for two different years and whether it felt “right” for me. I then did the math on how that breaks out by paycheck so I would know generally how much I can spend on each category: food, clothing, rent. etc. Over time, as my income has changed, I’ve adjusted what buckets should be increased or decreased. If a big trip or wedding pops up, I can decide which bucket to adjust to pay for the expense. When I spend, I have a sense of this in my head and still keep a semi-running mental list of each categories balance. If I go over in one, I know I’m making a trade-off in another and can decide if it’s worth it.
This may feel like a lot of work to but at the end of the day, finances are a big part of our life and saving isn’t always easy. It’s like delicious french fries staring at you from the table but deciding not to eat them because you want ice cream later. It feels easier to ignore finances but our decisions earlier in life usually come back to impact us later on, positively or negatively. Unfortunately, for most people, a lot of our decisions are impacted by our finances. If you’ve never made a budget, I encourage you to think about it today – find a system that works for you and start spending your money how you want to spend it… and don’t forget to save a little! As Jon Stein founder of Betterment shared on last week’s episode, $1 invested today can turn into $20 to $40 later in life! Don’t miss out!
Leslie Delery 